dubai commercial market outlook spring 2015 0

7/26/2019 Dubai Commercial Market Outlook Spring 2015 0

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COMMERCIAL MARKET OUTLOOK

Dubai, Spring 2015

holding steady during the first quarter. Many of the core freezones and submarkets we monitor are suffering from a lack ofavailability, while occupier demand remains robust.

The range of requirements filtering through range between 2,000-25,000 sqft, underscoring the diversity of business activity. Thefinance & banking, real estate and business services sectors havebeen especially active in recent months, with both existing andnew market entrants seeking out space.

Office rents stabilise

For the most part, office rents held steady across most of thecitys main submarkets and free zones in the final quarter of 2014.This does however mask the fact that prime Grade A rents endedthe year up almost 14%, while more secondary stock recorded asubstantial 24% uplift in 2014.

Secondary stock, which has previously been the strongestperforming office segment has however seen rents stabilise during

Q1. This has in large part been linked to the abundance of lowerquality stock which continues to trickle through to the market inlocations such as Business Bay and Jumeirah Lake Towers. This is aparticularly strong headwind and we expect it to hold back rentalvalue growth for stock perceived to be secondary or tertiary in theshort term.

Demand remains diverse and strong

2015 has seen the stability persist, with average prime rents

cluttons.com

250psfQ1 prime office rents 13.6%Change in prime office rents during 2014Source: Cluttons

AED

Source: Cluttons

Q1 2015 office rents across Dubais main submarkets

350

300

250

200

150

100

50

0

AEDpsf

TECOMA&B

JLT

SZR

D

eira

BurDubai

D

IFC

Ba

rsha

TECO

MC

Business

Bay

DubaiSiliconO

asis

DowntownDubai

Garh

oud

Lower limit Upper limit


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Our experience has also been reflected in the results of the latestDubai Economic Department Business Confidence Survey, where69% of responding businesses have indicated that they will investin capacity expansion over the next 12 months. This is marginally

down on the previous survey; however it does mirror the generalweakness in global investment confidence levels which have beenheld back by the volatility of oil prices, lower than anticipatedgrowth in China and the prolonged rumblings of a disorderlyGreek exit from the EU.

Despite this, the outlook for business remains very upbeat, with overtwo-thirds of businesses expecting a rise in their level of trading, while26% expect to increase their head count over the year.

Supply pipeline of prime office space limited

With the citys mature free zones such as Dubai Airport Free Zone,

Dubai Internet City, Dubai Media City and Dubai InternationalFinancial Centre operating at close to full occupancy, developersare rushing to bring new schemes to the market. TECOMInvestments for instance is pushing ahead with expansion plansat Dubai Internet City, where a further 1.6 million sqft is to bebuilt at the new AED 4.5 billion Dubai Innovation Hub. Elsewhere,Tecom Investments Dubai Design District is also rapidlyprogressing with the AED 4 billion first phase due to open laterthis year. This first phase has however already been pre-leased,which is expected to drive demand for further phases.

These new free zones, which are significant additions to thecitys office supply pipeline, are designed to serve specific niche

industries and therefore occupiers outside the technology-media-telecoms sectors have little choice but to widen their search.Those in search of Grade A space are increasingly turning theirattention to alternative submarkets.

Single ownership schemes in Business

Bay recording strong demand

The 58 storey Ubora Tower 1 at Business Bay, for instance, has

emerged as a prime benchmark for Business Bay, with occupiersseeking space in this market homing in on the scheme. The risingtide of demand is reflected in asking rents, which have almostdoubled over the past 24 months, rising from AED 80 psf in Q12014 to AED 170 psf in Q1 2015, including an AED 35 psf servicecharge.

As a whole, Business Bay remains the main stronghold of Dubaisnon free zone, strata-owned office stock. In our experience, it isthis strata-owned stock that is curtailing the rental potential ofBusiness Bay, as individual landlords of smaller units often haverent expectations that are out of kilter with market realities.

Compounding this are those landlords who have suffered fromextended void periods and are now attempting to undercut themarket by offering space for as little as AED 60 psf, which sitsbelow the current AED 70-140 psf banding for Business Bay.

Away from this multiple-owner stock, which continues to beavoided by larger international occupiers, the 53 storey, 480,000sqft Bay Gate is now ready for occupancy. Large floor plate sizesof 12,000 sqft and the towers proximity to Sheikh Zayed Road,are already helping to drive a high level of interest in this buildingwhich could rival Ubora Towers position as Business Bays premieroffice address.

DIFC remains citys most desirable submarket

To the north of Downtown Dubai at the Dubai InternationalFinancial Centre, top end rents have edged up to AED 325 psffrom AED 280 psf at the end of last year. Demand for space atthe DIFC remains strong, however, while supply has generally keptpace with the level of requirements in this submarket, much ofthe vacant stock is concentrated in strata owned stock, which islargely avoided by larger international occupiers. That said, stockunder single ownership is still expected to see rents maintain theirupward creep over the course of 2015.

Some new single ownership stock has recently been releasedto the market at Index Tower. The 17 floors of space owned byEmirates REIT consists of fully fitted, fully fitted & furnished andshell & core space. This space is likely to quickly become a newprime benchmark in this part of the DIFC due to the iconic natureof Index Tower.

The 53 storey Bay Gate (left) could rival Ubora Towers position as Business Bays premier office address.

Source: Dubai Economic Department Business Confidence Survey

Forecast business performance - Q4 2014

Increase Decrease No change

Percentage

Salesrevenue

Sellingprices

Volumessold

Numberofemployees

Profits

Newp

urchaseorders

100

90

80

70

60

50

40

30

20

10

0

2


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Across Al Saada Street, the 65 storey Buildings by Damanis witnessing a heightened level of occupier interest due tothe wider shortage of single ownership space at the DIFC, asoutlined above. We have recorded several instances of law

firms and petrochemical businesses moving into the schemerecently.

The overall performance of the DIFC varies greatly across the4.8 million square foot site. The Gate Precinct and adjoiningbuildings for instance command the highest rents and arethe most sought after. The second section of the DIFC whichincludes third party developers, such as Al Fattans CurrencyHouse, which is adjacent to the Gate Precinct, is the next mostdesirable location. Finally, the third party, single-ownershipdevelopments at the other end of the yet-to-be completedretail spine operate in a micro market environment, where

higher quality buildings, such as Index Tower and Park Central,command higher rents than smaller surrounding schemes. Theabsence of the promised retail spine is to an extent curbing thefull rental potential of some of the third party office schemes atthis end of the DIFC.

The micro market performance of theDIFC very closely mirrors our generalexperience across Dubais wider officemarket

Office market outlook mixedThe micro market performance of the DIFC very closely mirrorsour general experience across Dubais wider office market. Infact, our expectation for the rest of the year is for pockets withindevelopments to continue outperforming, with moderate rentrises likely for desirable buildings in the citys various submarkets.Elsewhere, rents are expected to remain stable, or in some cases,such as with some of the strata owned stock, downward revisionsare likely to persist.

Normalisation of global relations with

Iran may influence office market

On a more macro level, the prospect of the normalisation inglobal relations with Iran could have huge ramifications for theDubai office market, however this is still too early to adequatelyassess. It is however likely that international businesses willhub any Iran operations out of Dubai, should trade relationsbe normalised with the UAEs northern neighbour. Dubai hashistorically played an important role in facilitating trade betweenIran and the rest of the Middle East and this is likely to resumeshould all trade sanctions be lifted.

Industrial market buoyed by strong demand

Away from the office market, rents in the citys growing industrialsector are also still rising. The best performing submarkets in2014 were Al Quoz (Class 2) and DIP (Class 2), where rents grewby a record 43%. As we highlighted previously, DIP is viewed asan integrated industrial estate due to the presence of residentialaccommodation and various retail elements, which manyoccupiers find attractive. There is a distinct lack of stock and with

rents closing in on the AED 50 psf mark, occupiers are likely tostart being priced out, which suggests that although rents arelikely to maintain their upward trajectory, the pace of growth maybe lower than of late.

DIP remains popular with distribution, fabrication and coldstorage occupiers and the lack of stock is driving build-to-suit

development on the limited number of available plots.

Elsewhere, at Al Quoz, with fashionable retailers being drawn intothe area, rents are still rising. Furthermore, as the citys arts scenebeds into the submarket, we expect to see rents edge up furtheras it cements its place as the citys trendiest new alternative retailand arts hub. With12-month lease terms still the norm in Al Quoz,concerns remain about the potential for the areas redevelopmentin the future due to its central location.

Dubai World Central (DWC) is still recording brisk business,with occupiers rushing to secure sites in close proximity to Al

Maktoum International Airport and the Expo 2020 site. Thereis a high level of demand for land plots in the area, with someas large as 400,000 sqft. IKEA has become the latest occupierto set up a presence at DWC and will open its regional 1.1million sqft distribution hub in September this year. Thefacility will be able to handle 50,000 TEUs per year initially,rising to 70,000 TEUs within three years. We continue toreceive a high number of feasibility study requests for air-sideplots as logistics and distribution business increase their focuson this area. Hand in hand with the strong level of industrialrequirements at DWC, favourable rental and lease terms arealso attracting office tenants from the logistics, distributionand aviation sectors.

The overall buoyancy and strength of demand for industrial spaceis unlikely to weaken in the near term. And with space in manyprimary submarkets now in short supply, we do not expect any letup in the upward pressure on rents over the course of 2015.

Source: Cluttons

Performance of industrial rents

50

45

40

35

30

25

20

15

10

AEDpsf

Q12011

Q22011

Q32011

Q42011

Q12012

Q22012

Q32012

Q42012

Q12013

Q22013

Q32013

Q42013

Q12014

Q22014

Q32014

Q42014

Q12015

Al Quoz (Class 1)

JAFZA (Class 2)

JAFZA (Class 1)

DIP (Class 2)

DIP (Class 1)

Al Qusais

Al Quoz (Class 2)

Dubai Industrial City

3


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Cluttons LLP 2015. This publication is the sole

property of Cluttons LLP and must not be copied,

reproduced or transmitted in any form or by

any means, either in whole or in part, without

the prior written consent of Cluttons LLP. The

information contained in this publication has been

obtained from sources generally regarded to be

reliable. However, no representation is made, or

warranty given, in respect of the accuracy of this

information. We would like to be informed of any

inaccuracies so that we may correct them. Cluttons

LLP does not accept any liability in negligence or

otherwise for any loss or damage suffered by any

party resulting from reliance on this publication.

For further details contact

Steve Morgan

CEO of Middle [email protected]

+9714 365 7700

Ian Gladwin

Head of [email protected]+968 24564250

Murray Strang

Head of investment and agency, [email protected]

+9714 365 7700

Paula Walshe

Business headInternational corporate [email protected]+9714 365 7700

Faisal Durrani

International research &

business development [email protected]+44 207 647 7166


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:

[email protected]

+9714 365 7700

[email protected]

+968 24564250

[email protected]

+971 4 365 7700

[email protected]

+971 4 365 7700

[email protected]

+44 207 647 7166

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